Paul Merriman 4 Fund Portfolio – Backtest And Performance
Last Updated on April 18, 2023
Paul Merriman is a financial advisor and has presented several low-cost “passive” investment strategies. One of them is Paul Merriman 4 Fund Portfolio. What is it, and how has it performed?
Paul Merriman 4 Fund Portfolio is a simple investment strategy consisting of four low-cost index funds with large caps, small caps, and small cap value. It was designed by Paul Merriman, a well-known financial educator and advisor, as a low-cost, diversified portfolio that individual investors can easily implement.
Let’s look at the strategy and its historical and current performance:
Who is Paul Merriman?
Paul Merriman is a financial advisor and founder of Merriman Financial Education foundation, a non-profit organization providing free resources and educational material to help people achieve financial goals.
Merriman has written three books:
- Live It Up Without Outliving Your Money!
- Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind
- Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor
Merriman has also been a frequent speaker at financial conferences and events and contributed to many financial publications and websites.
However, Merriman is most famous for his work on low-cost, passive investing strategies, such as the “Ultimate Buy and Hold Portfolio” and the “Four Fund Portfolio”, which we cover in this article. Both strategies are designed to help individual investors achieve their financial goals with minimal cost and effort. He strongly advocates index investing and believes most investors are better off with a simple, diversified portfolio of low-cost index funds.
Today, Merriman is retired, but he continues to write and speak on financial topics, and his work has had a lasting impact on the investment industry and individual investors alike.
What is Paul Merriman’s 4 Fund Portfolio?
As the name implies, the portfolio comprises four funds (ETFs). Each holding is equally weighted.
The main idea behind the holdings is to capture risk premiums based on long-term evidence. To be precise, Merriman aimed at size and value factors. Historically, small caps have offered higher returns than large caps, and value stocks have proved to return slightly better than growth stocks. Even better, small-cap value stocks have proven better than large-cap value.
By combining these two factors, you should get a better return than the market over the long term. That’s the simple reasoning behind the portfolio.
Paul Merriman 4 Fund Portfolio Asset Allocation
The portfolio consist of the following assets:
- 25% S&P 500
- 25% large caps
- 25% small caps
- 25 small cap value
Paul Merriman 4 Fund Portfolio ETF selection
For our backtest (see more below), we chose the following ETFs:
- S&P 500: SPY
- Large cap: VV
- Small cap: IJS
- Small cap value: VBR
Paul Merriman 4 Fund Portfolio historical performance
There is a reason why Paul Merriman suggested the exact portfolio composition as he did. Merriman has provided the facts on his website:
US small cap (US SCB) and US small cap value stocks (US SCV) have outperformed S&P 500 massively! The blue circle shows the return of the 4-fund combo, and it’s been 1.7% higher than S&P 500.
Some might argue this doesn’t sound like much of a difference, but over 30 years, it makes a huge difference. We made the chart below to show you how the 1.7% more in annual returns compound (or snowball) over 30 years:
A 10 000 investment today is worth 29 000 after 30 years with 11.9% returns (yellow bars) compared to only 18 500 with 10.2%! This is the magic of compounding.
Paul Merriman 4 Fund Portfolio ETF backtest and performance
We downloaded the four different ETFs into Amibroker and backtested them from 2011 (SPY, VOO, IJS, and VBR). We got the following equity curve:
The annual return was 10.6%, and the max drawdown was 39%. This is below the CAGR of S&P 500 during this period, and thus the Merriman 4 fund portfolio has underperformed. Any strategy will sometimes underperform, and we believe this is to be expected from time to time. The logic and reasoning behind the strategy is not flawed; we expect the portfolio to outperform later.
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